WSJ : OPEC Divided on the Right Price for Oil

OPEC Divided on the Right Price for Oil
Iran wants to see $60 a barrel to rein in shale producers, while Saudi Arabia’s budget needs $70

OPEC is breaking down into two camps after more than a year of unity. On one side is Saudi Arabia, which wants oil prices at $70 a barrel or higher, and on the other is Iran, which wants them around $60.

The split is driven by differing views over whether $70 a barrel sends U.S. shale companies into a production frenzy that could cause prices to crash. At stake is the Organization of the Petroleum Exporting Countries’ production limits, which are among factors helping the oil market’s monthslong recovery.

Iran wants OPEC to work to keep oil prices around $60 a barrel to contain shale producers, Oil Minister Bijan Zanganeh told The Wall Street Journal in a rare interview. That is a little below Friday’s prices of $65.49 a barrel for Brent crude, the international benchmark, and $62.04 in the U.S.

“If the price jumps [to] around $70…it will motivate more production in shale oil in the United States,” Mr. Zanganeh said. Shale producers are more nimble than big OPEC producers, using techniques that allow them to increase or decrease production depending on the oil price.

Saudi Arabia has played down shale’s ability to upset the market and has touted OPEC’s alliance with the world’s largest crude producer, Russia, as a bulwark against U.S. output.

Russia and nine other producers have joined OPEC’s production limits, cumulatively withholding about 2% of the world’s crude output.

“I don’t lose sleep that shale is going to come and overwhelm us,” Saudi Energy Minister Khalid al-Falih said in January at the World Economic Forum in Davos, Switzerland. The following month, Mr. Falih said OPEC would stick with its production limits this year, even if it meant oil supplies fell below demand—remarks that caused oil prices to rise.

Mr. Falih has never publicly called for $70 a barrel. Privately, Saudi officials say they want that level to provide revenue for Crown Prince Mohammed bin Salman’s ambitious economic and military spending plans and to support the initial public offering of Saudi Arabian Oil Co., the state-owned energy giant known as Aramco.

The reaction of U.S. shale producers to $70 a barrel was a focal point in January, when Brent crude briefly breached that level. Shale producers have generally ramped up output since OPEC’s production deal in 2016 sent oil prices into recovery mode, with U.S. daily output rising to over 10 million barrels in just over a year from less than 9 million barrels.

If oil prices averaged $70 a barrel next year, it would result in an additional 600,000 barrels a day of U.S. production compared with $60, said Artem Abramov, vice president for analysis at Norwegian consultancy Rystad Energy.

The International Energy Agency said this week that shale production had already risen so much that demand for OPEC crude would remain below the cartel’s current production through 2020. That could pressure the group to limit output for longer than most members anticipated.

Concerns about shale output will likely dominate OPEC’s next meeting in June in Vienna, OPEC officials say.

Iran will press for carefully bringing back some of its own production, Mr. Zanganeh said, potentially putting downward pressure on oil prices. The country pumps about 3.8 million barrels a day and could produce about 100,000 barrels a day more.

Mr. Zanganeh said OPEC could agree in June to begin easing current production limits in 2019. The Saudis have expressed openness to that idea.

The debate over prices reflects a shift in OPEC’s internal dynamics. Previously, Iran had long advocated for higher prices, while Saudi Arabia had been a voice of restraint.

The change partly reflects new dynamics in both countries’ politics and economics. No longer crippled by Western sanctions, Iran needs an oil price of only $57.20 a barrel to balance its national budget, according to the International Monetary Fund. Saudi Arabia needs about $70 a barrel to cover record national spending this year.

Saudi Arabia and Iran are also at odds politically. They have backed different sides in the Syrian civil war, the Saudis have lobbied for tighter sanctions on Tehran, and Riyadh accuses Iran of funding and arming Yemeni rebels.

Mr. Zanganeh insisted Iran wants to have a good relationship with the kingdom.

Russia is likely to be an important factor in any OPEC oil-price debate. Though it isn’t a member of the group, Russia’s production cuts have given it special influence with the cartel.


Russian Energy Minister Alexander Novak told state TV last month that prices around $64 a barrel were “satisfactory.” A spokeswoman for the ministry couldn’t be reached for comment.

The division also marks an opportunity for Mr. Zanganeh, OPEC’s longest-serving oil minister, to again assert his power. He negotiated a special carve-out for Iran to cap, but not cut, its production so the country could attempt an oil-industry comeback following the end of nuclear-related sanctions.

Mr. Zanganeh expressed skepticism over OPEC’s previous efforts to contend with shale production. He told The Journal that a meeting last Monday in Houston between top OPEC officials and shale-company executives was unnecessary because U.S. producers can’t reach comprehensive agreement on output.

“It’s 1,000 entities. They don’t have an union” of shale producers, he said. A production “cut is the only thing that OPEC has to manage the market.”

>>> Barrons weekend update: positive feature on CCE

Barrons weekend update: positive feature on CCE

* Cover story: As employers scramble to rebuild their workforces in the wake of the recession, industries as varied as trucking, construction, retailing, fast food, oil drilling, technology, and manufacturing are having difficulty finding qualified help.

* Features: 1) Automation is revolutionizing industries from trucking to medicine and will eliminate jobs, but other positions will be created by the need to handle higher-level work that robots can’t perform; 2) Barron’s Best Fund Families of 2017 list is topped by Natixis Investment Managers, Vanguard Group, T. Rowe Price, TIAA Investments, and Fidelity Management & Research; 3) Cautious on MTW, CAT, OSK, NAV, TEX, GM, F: Companies are among those that could lose some percentage of earnings next year if they can’t pass along to customers a rise in steel prices that are the result of Trump administration tariffs; 4) Positive on CCE: Company’s success in the low-growth beverage business, where it has emphasized drinks with few or no calories, isn’t reflected in its stock price.

* Tech Trader: Companies such as IBM and ADSK are taking a cue from younger tech firms such as CRM by increasingly using financial jargon that isn’t found in traditional accounting—and the lingo is leading to sometimes startling effects, including share price pops.

* Trader: A heavy weighting in technology and a lack of exposure to the sectors such as utilities and staples have given the Nasdaq a boost, but the S&P 500 and the Dow are likely to climb higher as well; Consumer staples in the S&P 500 are expected to grow earnings by 11.4% this year, but investors need to be selective, given fundamental risks—STZ is better positioned than many others; “Good things may come in small packages, but small-company stocks still don’t have the heft necessary for their recent outperformance to continue.”

* Interview: Ed Yardeni of Yardeni Research discusses insights from his long career, bitcoin—which he thinks face greater regulation—and why he’s still bullish. Advisor Ranking: Most of the advisors in Barron’s Top 1,200 Financial Advisors ranking “see a bull market that, in its ninth year, is getting long on the tooth, but they aren’t concerned about a bear market or a recession in the near future.”

*European Trader: Bullish investors say Portugal still offers a good deal, because the country is benefiting from a greatly improved economic backdrop and stocks are cheap relative to global peers. Asian Trader: Asia has been reducing its reliance on trade as it boosts domestic demand; intraregional trade accounts for 60% of all Asian trade and is growing faster than commerce with the rest of the world.

* Emerging Markets: “If lithium, the metal used in electric-car batteries, is the new oil, then Chile is pushing to be its Saudi Arabia,” a process that could prove difficult.

* Commodities: U.S. steel prices have already gotten a boost from the Trump administration’s proposed tariffs, which should keep prices high and domestic demand strong this year.

* Streetwise: The regime of Venezuelan president Nicolas Maduro will eventually falter as the country continues to deteriorate, leading to the possibility the military may intervene.

Barron's : Portugal: Land of Tempting Stock Bargains

Portugal: Land of Tempting Stock Bargains

Many bargain hunters keep grumbling that nearly everything looks overpriced, even with stocks worldwide selling off in recent weeks.

But is one corner of Europe—Portugal—offering a good deal? Yes, say the bulls, as they emphasize that it’s benefiting from a greatly improved economic backdrop. “The Portuguese stock market is cheap, relative to the global stock market,” says Peter Garnry, head of equity strategy at Denmark’s Saxo Bank, which has made Portugal one of its 2018 equity picks.

One exchange-traded index fund that broadly bets on the southern European nation—U.S.-listed Global X MSCI Portugal (ticker: PGAL) has a price/earnings ratio of 15, versus the Vanguard FTSE Europe’s (VGK) 17, the SPDR S&P 500’s (SPY) 22, and the Vanguard Total World Stock’s (VT) 19.

Portugal’s market is a sizable part of one equity ETF that aims to scoop up our planet’s biggest bargains—Cambria Global Value (GVAL). “Across our four long-term valuation metrics, it’s one of the cheapest in the world,” writes Meb Faber, Cambria’s CEO, in an email. The ETF is weighted 9% toward Portugal, and Faber says the country’s stocks will remain in the fund, following an annual rebalancing this month based on Cambria’s quantitative screens.

What about the potential for a hit due to another Piigs country? Italy, part of a group that often spooks markets— Portugal, Italy, Ireland, Greece and Spain—worried investors again with its March 4 general election, which produced no clear winner, but tilted away from mainstream politicians.

Writes Garnry in an email: “If the new government in Italy impacts sentiment negatively, then we will re-evaluate.”

Analysts have warned that a euroskeptic Italian government could derail the euro zone’s economic recovery. A battle to form a coalition government is under way, with the antiestablishment 5 Star Movement jostling with a center-right alliance that involves the populist League party and former Prime Minister Silvio Berlusconi’s Forza Italia. Each faction is considering deals with members of the center-left Democratic Party.

For now, bulls can still point to a range of encouraging indicators, from sentiment readings to the latest figures on gross domestic product. “Investor and consumer confidence remains high in the euro area and Portugal,” Garnry says. “We remain positive on Portuguese equities in 2018,” he adds, barring a “dramatic downturn in macro fundamentals.”

Some assessments of Portugal’s health make it sound like it’s time for a toast with a glass of port. “Overall, the economy experienced a noteworthy turnaround in 2017, with full-year GDP growth soaring to a 17-year high of 2.7%,” writes Nihad Ahmed, an economist at FocusEconomics, in a recent note. She has concerns about the small country’s big debts, as well as muted wage gains and an expected slowdown in exports. But she adds that FocusEconomics panelists forecast a 2.2% rise in GDP this year and 1.9% growth in 2019. “The job-rich recovery should continue at a healthy pace, thanks to a flourishing tourism sector, strong real estate investment, and solid exports,” Ahmed says.

In a note, ING economist Steven Trypsteen predicts that Portugal’s fiscal policy ought to “remain mildly expansionary, although room for much laxer policy is limited as the Portuguese finance minister, Mário Centeno, is now heading the Eurogroup.” In other words, Centeno can’t become too lavish at home while leading a European Union group that has some relatively thrifty members.

Portugal’s PSI 20 equity benchmark is up about 17% over the past 12 months, versus the pan-European Stoxx Europe 600’s 1%. Yet at around 5400, it remains far from its 2015 peak near 7800 and its 2007 high around 13,700.

The country’s stock market is heavy on energy and utility companies. The Global X MSCI Portugal ETF’s two biggest holdings—each of which is more than 20% of the fund—are Galp Energia (GALP.Portugal) and Energias de Portugal (EDP.Portugal). That leads analysts at ETF.com to warn that the fund, which has just $51 million in assets under management, is “highly concentrated,” though “still a good proxy for the broad Portuguese market.”

IN EUROPE LAST WEEK, the main equity indexes mostly rallied. Investors appeared to shrug off some of their fears about a global trade war, sparked by President Donald Trump’s planned tariffs on foreign steel and aluminum.

The advance came as the European Central Bank left interest rates unchanged, as expected, but moved closer to ending its quantitative-easing program, a key stimulus effort. The ECB dropped its commitment to ramp up asset purchases if the economic outlook deteriorates, though ECB President Mario Draghi followed that up with dovish remarks.

Draghi denounced tariffs, without directly mentioning the U.S. “If you put tariffs against your allies, one wonders who the enemies are,” he said. Meanwhile, EU officials laid out an approach for striking back against such levies.

Recode : Hollywood producer Jason Blum thinks movie studios and theaters have al

Hollywood producer Jason Blum thinks movie studios and theaters have already lost the battle to Netflix
The filmmaker says it’s “preposterous” that some studios insist on their movies being seen in theaters.Filmmaker Jason Blum thinks that the battle between studios, theaters, and streaming services like Netflix over how movies are released is basically over — and his industry lost.

The movie industry has long been debating when films should be offered outside of theaters. Simultaneously? After weeks? After months? Well, Blum said Saturday that during that negotiation, companies like Netflix and Amazon won by creating their own content that effectively allowed them to usurp the studios.

“We in the movie business kind of missed the boat,” Blum told Recode’s Peter Kafka at SXSW in Austin, Texas. “While we couldn’t figure out an agreement to let people do what they wanted to do, Netflix said ‘You guys keep fighting. We’re going to give the consumer what they want, and we’re going to give them movies at home’’.”


Blum, who is obviously a fan of the communal experience that comes from watching a film with others in a theater, said it’s a “shame” that happened. But there’s no turning back: “The horse is gone.”

Known for his low-budget horror films like “Get Out” and “Paranormal Activity,” Blum had a lot to say about what he saw as his industry’s strategic mistakes. While there had been some recent momentum toward a grand deal that would allow providers like Netflix to show films sooner than when they were shown in theaters, Disney’s purchase of 21st Century Fox is seen as a major setback given Disney’s affinity for the in-theater, blockbuster experience.

The cultural impact of studios losing the fight? Blum said he worried that the entire movie industry would not stay relevant if it kept demanding that a younger generation of content-viewers only view content the way that Hollywood demanded.

“I really disagree with filmmakers telling the audience they have to see a movie in a movie theater. What that did, in my opinion, is make television series much more culturally relevant than movies,” he said. “The notion in 2018 or ‘19 of telling the consumer — of telling an 18-year-old — where he should see what you made is preposterous.”

You can watch Blum’s full interview from SXSW below.

FT : Fears over future market crash stalk Norway’s $1tn oil fund

Fears over future market crash stalk Norway’s $1tn oil fund
If an economic crisis hits, Oslo could be forced to use the fund more aggressively

In 2008, as the global financial system crashed, the investment portfolio of Norway’s oil fund had its worst year ever, yet the sovereign fund managed to increase in size.

Its equities and bond investments dropped 23 per cent that year. But the world’s largest sovereign wealth fund was saved by both a big inflow of money from Norway’s petroleum revenues as oil prices remained high and a large boost from the exchange rate as the krone weakened. 

Many are now wondering what would happen to Norway’s $1tn oil fund if things are different in the next crisis. 

The fund itself warned last week that a crash could wipe away more than 40 per cent of its value, particularly if the Norwegian krone became a safe haven currency and strengthened. 

That has many experts worried that one of the few sovereign wealth funds located in a democracy could be drained rapidly in a real market crisis. 

“The fund is untested in a crisis. The political system is untested in a crisis. By being poorly prepared we are running the risk of screwing the fund,” says Espen Henriksen, associate professor at the BI business school in Oslo and an ex-fund official. 

The problem is that Norway’s government has become increasingly used to the doping the oil fund provides for the state budget. Under the so-called spending rule, which was revised last year, the government is allowed to use up to 3 per cent of the fund annually. This year it will use about 2.9 per cent, or NKr231bn. 

That is a record amount in krone, and represents fully 18 per cent of total government spending. The concern of some in Oslo is that, in an economic crisis that hits Norway hard, use of the oil fund may have to increase significantly to offset any fall in government income. “It is not unthinkable that you could have to use 10 per cent of the fund,” says one government official. 

That would drain the fund further, while the alternative would be to cut spending just as the economy needs it most. For Prof Henriksen, such a dilemma would test the fund and the cross-party political support it enjoys as never before. 

“These are the really hard questions about the fund. This political consensus may extremely quickly evaporate in a crisis. The robustness of the savings mechanism has not been tested. To say we have a NKr5tn fund — and we’re going to cut spending on hospitals, schools?” he asks. 

It is little wonder, therefore, that fund officials have stepped up their warnings about what could happen in a future market crash. No press conference with Yngve Slyngstad, chief executive of the fund’s manager, goes by without him intoning that the exceptional market conditions of the past decade are unlikely to last. 

Asked about figures that show last year the fund’s cumulative return on investments exceeded the inflows from petroleum revenues for the first time, he tells the Financial Times: “It is a pause for reflection about this enormous tailwind we had with regards to the growth of the fund during the past six years, or even since the financial crisis. The numbers are mind-boggling with regards to the size of the fund we have accumulated.” 

The fund is now worth NKr8,000bn or $1tn and on average it owns 1.4 per cent of every single listed company in the world. It is worth four times the amount it was in 2008. 

Oystein Olsen, Norway’s central bank governor who oversees the fund, has made regular warnings as well about the possibility for the fund’s value to fluctuate. But he says this is not done for “tactical considerations of any kind — what we observe is the data”. 

Senior government officials argue that the fund is robust and the spending rule is flexible enough for the government to ride out any market downturn. “We can smooth our spending over the cycle. There is very strong consensus around taking care of the fund,” one says. 

Still, concerns remain. One is that any fall in markets might not be followed by such a strong rebound as in 2009. If 2008 was its worst year, 2009 was its best with a return of 26 per cent on its investments. Mr Slyngstad cautions: “You never know whether history will repeat itself or not, so you have to be prepared for a situation where we do not get a rebound in markets if we have a considerable correction.”


Another is over how the public might react. The 23 per cent fall in 2008 was greeted with much hand-wringing and the fund was forced to change strategy. Mr Slyngstad concedes there was “a lot of discussion internally on whether we should state” that a more than 40 per cent fall was possible. 

Asked if it would be his nightmare scenario, he laughs nervously. “It’s very hard to guess in advance what the political and media discussions would be in advance of events,” he adds. 

Prof Henriksen argues the fund is more vulnerable to a crash in other ways now as well. Petroleum revenues from the government have slowed to a trickle at best, the budget is more dependent than ever on oil money, and the fund itself has taken on more risk by increasing its equity holdings to almost 70 per cent from 47 per cent at the start of 2008. 

“In 2008, 09, 10, it [the size of the fund] never went down. It was massive inflows first, then a massive bull market. Now, it’s a really worrisome question,” he says.